Accounting for Share Capital Notes7

Study Material & Notes for the Chapter 8

Partnership - ACCOUNTING FOR SHARE CAPITAL

VII  FORFEITURE OF SHARES

1) Meaning of Forfeiture of Shares
  • The issue price of shares is payable in instalments i.e. on application, on allotment and on calls made from time to time by the Board of Directors of the Company.
  • Sometimes some shareholders fail to pay the called-up amount in full i.e., they do not pay one or more instalments after the allotment of the shares to them.
  • In such a case either the company can go to the court and file a suit against the defaulting shareholders for recovery of the due amount or can cancel the membership of the defaulting shareholders.
  • In case the membership is cancelled, the amount paid by the defaulting members towards share capital stands forfeited. It is called ‘Forfeiture of Shares.’
  • With the cancellation, the defaulting shareholder also loses the amount paid by him/her on such shares.
2) Effect and Results of the Forfeiture
  • Cancellation of membership of the defaulting shareholder.
  • Reduction of issued Share Capital of the company.
  • Company forfeits amount paid by Defaulting shareholder on such shares. 
  • Defaulting shareholder loses amount paid by him/her on such shares.
3) Accounting Treatment – Shares Issued at Par
share capital_7.3.1
4) Accounting Treatment – Shares Issued at Premium
Case -1 Premium on shares has been received prior to the forfeiture
  • Amount of Share premium once received, stays in the Securities Premium A/c and cannot be reversed or credited to any other account. Section 52 of the Companies Act, 2013 restricts usage of share premium for certain specific purposes only
  • In this case the journal entry of forfeiture of shares will be similar to the entry made as if the shares had been issued at par.
Case -2 Premium on shares has not been received prior to the forfeiture
  • In this case, amount of Share Premium is due but money against these are not yet received.
  • As the amount towards Share Premium will not be received, we can reverse the Securities Premium Reserve A/c as well as the Amount due